The coming Global Food Crisis

Dear PGM Capital Blog readers,

In this weekend’s blog edition, we want to elaborate on the coming food crisis, what securities to invest in, in order to hedge against it.

There is reason to believe that we are now entering a time when there will not be nearly enough food for everyone in the world and that food commodity prices will be both higher and more volatile in the decades to come.

The following shows that a global food crisis is coming:

• The world is losing topsoil at an astounding rate, in fact one third of the world’s cropland is losing topsoil faster than new soil is forming through natural processes.
• Due to rising gasoline prices and subsidies on ethanol subsidies a great part of farmland globally is being used to grow corn or sugarcane for the production of biofuel, putting stress on the price of corn and sugar.
  
• Water tables all over the globe are being depleted at an alarming rate due to “overpumping”.
• Diseases such as UG99 wheat rust are wiping out increasingly large segments of the world food supply.
• Oil intensity in Food production: almost 20% of all hydrocarbons used on the planet is being used in the food chain as follows:
  • Modern agriculture depends heavily on the use of gasoline and diesel fuel in tractors for plowing, planting, cultivating, irrigation and harvesting.
  • Most fertilizers are oil or natural gas based.
  • Pesticides are oil based.
• Rising living standards in emerging countries have increased their demand for and consumption of fruits, dairy products, meat, poultry, seafood, vegetable oils etc.
• Decreasing availability of fertile farmland, due to industrialization, urbanization and hospitality industry.
• At some point the world could experience a very serious fertilizer shortage and will not have enough phosphorous compounds to meet agricultural demand in just 30 to 40 years.
• Climate change affects agricultural production through its effects on the timing, intensity and variability of rainfall and shifts in temperatures and carbon dioxide concentrations.
  A looming vulnerability is the world’s fisheries, which provide an important source of protein for at least half the world’s population. Fisheries are already stressed by overexploitation and pollution. Warming surface waters in the oceans, rivers and lakes, as well as sea level rise and melting ice, will adversely affect many fish species.
• According to a recent report from the Union Nations, world grain reserves are so dangerously low that severe weather in the U.S. or other food-exporting countries could trigger a major hunger crisis in 2014.
• With food consumption exceeding the amount grown for six of the last 11 years, countries have run down reserves from an average of 107 days of consumption 10 years ago to under 74 days recently.

The longer-term global population forecast shows an increase from 7 billion to almost 9 billion by 2040 and the number of middle-class consumers will increase by 3 billion over the next 20 years.

As a result, the world will need 50% more food for the booming population. Furthermore, most of the growth in population will be in less developed countries. There is not much room for expansion of arable lands in these countries. Consequently, most of the required increase will have to be met by increasing crop yield.

Data from the International Monetary Fund, indicates that the commodity food price index has risen 9.42 percent in the last 12 months and 114.26 percent in the last 10 years as can be seen from charts.

 

Definition Food Price Index:
The “Food Price Index”, or FFPI as it is also known, is compiled by the
Food and Agriculture Organization (FAO) of the United Nations. 

Also to FAO.org, the Food Price Index is “a measure of the monthly change in international prices of a basket of  the following food commodities:

• FAO Cereal Price Index
• FAO Dairy Price Index
• FAO Oils & Fat Price Index
• FAO Meats & Seafood Price Index
• FAO Sugar, Bananas and Oranges Price Index

According to the World Bank, 44 million people around the globe have been pushed into extreme poverty last year due to rising food prices. Combined with the fact that currently about 3 billion people around the globe live on the equivalent of 2 dollars a day or less, this means that a global food crisis has the potential for increased global conflicts, social-political unrest and riots.

When food prices hit a certain critical level, people tend to turn to violence because their desperation hits a level at which they have nothing left to lose.

As the chart below shows, the Arab Spring protests, along with protests elsewhere in the world coincided with two huge peaks in global food prices.

In above chart plots a measure of global food prices (the FAO Food Price Index) is indicated in black and the timing of various protests in red lines. The numbers in parentheses following each country are the number of deaths.

Below chart shows shows how many of the recent protests coincided with the breach of a specific level of food prices. The numbers in parentheses following each country are the number of deaths.

Food prices have dropped modestly since the spring of 2011, but the long-term trend is up, which is shown in below chart, whereby the conclusion is that the long-term trend of rising food prices will hit the flashpoint again by August of 2013.

Hedging against the coming Global Food Crisis:

Investors seeking to profit from the insatiable demand for food and subsequent coming food crisis have the option of hedging against it by investing in securities (Stocks and ETFs) of food producers or agricultural commodity prices via futures.

Further increases in food prices have the potential to spark riots and revolutions in emerging markets. An investment in the underlying commodities may make sense as part of a strategy for protecting a portfolio.

Our research team has compiled below 4 securities that have the potential to put a smile on your portfolio, while food prices put a hole in your wallet.

1. BRF S.A.
   BRF S.A., together with its subsidiaries, engages in raising, producing, and slaughtering poultry, pork, and beef in Brazil. The company is also involved in processing and selling fresh meat, processed products, milk and dairy products, pasta, frozen vegetables, and soybean derivatives. Below chart shows the all time performance of this company’s stock.
2. Monsanto:
   Monsanto Company, together with its subsidiaries, provides agricultural products for farmers worldwide. It operates in two segments, Seeds and Genomics, and Agricultural Productivity. Below chart shows the all time performance of this company’s stock.
   
3. Archer Daniels Midland Company
   Archer-Daniels-Midland Company manufactures and sells protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients; and processes oilseeds, corn, wheat, cocoa, and other agricultural commodities. Below chart shows the all time performance of this company’s stock.
   
4. Market Vectors Agribusiness ETF
   The fund invests at least 80% of its total assets in securities of companies that generate at least 50% of their revenues from:
   • Agri-chemicals and fertilizers, seeds and traits,
   • Farm- & irrigation equipment and farm machinery
   • Agricultural products (including flour and grain, meat and poultry, and sugar), aquaculture and fishing, live stocks and plantations.

Below chart shows the all time performance of this company’s stock.

This ETF is ideal for relatively small portfolio’s, which want to have exposure to the value chain of the agribusiness.

For people that want to track the futures of food commodities, the following ETF’s are advisable:

• PowerShares DB Agriculture ETF
• UBS Agriculture TR Sub-Index ETN
  

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of food commodities s as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek